The workforce is the lifeblood of any company and if you are facing a situation where you cannot pay your staff at the end of the month then the business is clearly insolvent and action needs to be taken.
So, when this nightmare becomes reality, what can you do? Do you have options? Let’s explore this further…
Why can I not pay my workforce?
It sounds obvious but it is cashflow! Remember a company can be making a profit on paper but if the money is not in the bank then your business may have cashflow problems. This may be short term, for example due to seasonality. However, it may also be longer term. This could be due to bad debts or a loss of large contracts. Late payments from clients could also be a factor. This means that the company will always be trying to “catch up”.
Do I have any options to try and resolve this?
It depends on whether cashflow problems are short or long term.
If the business is suffering due to historic debts to suppliers or HMRC then the best option would be to try and restructure these debts or reach a deal with your creditors. This is especially true if the business is “profitable” going forward. Solutions could be in the form of a debt standstill arrangement, an extended time to pay deal or even a Company Voluntary Arrangement (CVA).
You may need professional advice to advise you whether the business is viable. It is not always easy to assess your own business as you are too emotionally attached to it.
- Withhold payment, temporarily of course, from a non-mission critical supplier or HMRC. This is known as robbing Peter to pay Paul and should be a last resort.
- Loans may be taken out. This could be from a family member, friend or bank, and can be either short term or long term. The most appropriate would be to take out a short-term loan as this carries less risk for the business. It is likely in this scenario that any loan will need to be personally guaranteed so think hard about the risks.
- Talk to staff and explain to them the situation truthfully. Ask them to wait for payment, explaining how you believe the business will be able to pay. Hopefully, the response will be positive and aligned to support the business. You should do this as soon as you realise you are unable to pay their wages, giving them a pre-warning, so it does not become a nasty shock on pay day. It is more likely to have the situation understood and accepted, as you would be seen to be taking responsibility and being fair, giving employees the chance to find alternative plans for obtaining money to fund that periods living expenses. A word of caution. This is most likely to work in very small businesses of less than 10 employees. In larger businesses staff are less close to management and are less likely to be supportive.
Talk to us to see how we can help. If you can’t pay the wages then the business is insolvent and as a director you have a duty to the creditors. Call us on 0800 970 0539 today.